ACCT525
Week 1 Assignment
The Phar-Mor case relates to a marked accounting fraud and collusion by management officials that finally surfaced in 1992, after several years of falsified inventory records and financial reports. Phar-Mor, Inc. was a private retail company that was growing attention and market share in the mid 1980’s. This chain of discount drugstores grew to 310 stores in in 34 states before investor losses reached $500 million and they declared bankruptcy. In this cover-up scandal management maintained fictitious gross sales and inventory levels that created an illusion of success. The top executives at Phar-Mor that were responsible for this scheme ended up …show more content…
He came in requesting an evaluation of the company’s accounting records and found usual accounting transgressions. This Houston-based public waste management company then faces a historic restatement of earnings from 1992 to 1997 and this led to further investigation of accounting fraud. At this time, this was the largest corporate restatement in history and one of the most conspicuous executive accounting scandals seen by the Securities Exchange Commission (SEC). Management had deliberately inflated earnings to meet target margins and deferred current period expenses such as depreciation expense. There were implications that several of the chief accounting officers were previously employed by Arthur Andersen which poses some questions about this connection and the independence of the audit. Andersen would present the company with “Proposed Adjusting Journal Entries” (PAJEs) needed to correct any overstated earnings and understated expenses, however; management often refused to make the necessary changes. This relationship developed into colluded agreement with Andersen to write off accumulated errors found across the 1990s. Top executives had profited tremendously from this scandal at the expense of the shareholders which led to a $457 million class-action suit and Andersen was fined $7 million by the SEC (Ball, …show more content…
The criminal justice department and the SEC were conducting their investigations during the same time period as the development of Sarbanes-Oxley Act of 2002 (SOX). In the early 1990s, Enron had become successful for their innovative practices of improve companies financials through structuring Special Purpose Entities (SPE’s). Under these complex transactions, Enron clearly masked their debt liabilities by selling assets between these limited partner shell companies and fabricated profits. It was hardly a coincidence that yet another Houston commodities corporation in connection with Arthur Andersen had misrepresentation and fraudulent reporting. This systematic corporate scheme led shareholders loss of $74 billion and caused employees and investors to lost retirement accounts. Several key management players, along with Andersen, were found guilty of fraud and most of them severed prison time (Willits; Nicholls,